Supplier Management Is More than Just Negotiating Contracts

Posted by on September 6, 2016 in ITIL

Supplier Management Is More than Just Negotiating Contracts

We all know IT organizations that run into difficulties working with their suppliers. They seem to really struggle, enduring fractious relationships and contracts that don’t meet their needs. On the other hand, some IT organizations enjoy positive relationships with a range of suppliers and seem able to get really good value for money. What is it that helps them achieve this? And what gets in the way?

Some Contracts Are Not Perfect

Some of the IT organizations that I work for rely on their procurement department to manage their suppliers. I’ve worked with a number of IT organizations that have less-than- ideal contracts with their suppliers due to typical scenarios like this:


  1. IT gives their requirements to procurement.
  2. Procurement negotiates and agrees on a contract with a supplier.
  3. The contract is not an exact match to the original requirements, as procurement has made a decision based on cost, and the ability to meet what they consider to be the most important requirements.
  4. The IT organization is then left to pick up the pieces and manage as best they can.

The contract doesn’t meet the required needs, the supplier isn’t helpful, the customers aren’t happy, and IT gets the blame. But it’s not their fault - and the contract has another five years to run.

Good supplier management can help you to manage situations like these. You may be stuck with a poor contract, but that doesn’t mean that you have to put up with poor service from your supplier.

Everyone Needs Supplier Management

All IT organizations need effective supplier management, because they all need a wide range of suppliers to help them deliver services. Sometimes there are suppliers delivering nearly all of the services, in which case these suppliers have to be managed. But even if your IT department has a supplier doing Supplier Integration and Management (SIAM) so you don’t have to, you still need to manage that supplier!

At the other extreme, you may come from an organization that runs all of its IT in-house, with your own software developers, service desk, infrastructure, and support. But you still have suppliers to manage. Even if you use only open source software, with no license restrictions or costs, you still have to obtain electricity and internet connectivity from suppliers. And very few organizations are big enough to deliver their own level 3 operating system support, even if they have open source operating systems.

So what can you do to manage suppliers well?

Three Levels of Supplier Management

There are three different timescales over which you need to do supplier management, and each of these needs a different approach, and each may be done by different people.

Strategic Supplier Management Decide which suppliers to work with.
Negotiate and agree contracts.
Tactical Supplier Management Review supplier performance regularly (usually monthly).
Manage service levels.
Operational Supplier Management Manage day-to day work activities, for example escalating incidents to the supplier or accepting deliverables from them.

Strategic Supplier Management

This is the activity that is often carried out by a procurement department. It involves deciding which suppliers you want to work with and carrying out any legal, regulatory, or compliance checks to ensure that you will be able to work with them. Then, for each individual contract, it involves documenting the requirements, managing a process to enable suppliers to bid for the work, selecting a preferred bidder, and negotiating and agreeing a contract. There may be annual reviews, but usually the strategic component of supplier management will not have anything more to do until the contract is due for renewal. Getting things right at this level can avoid a whole host of problems further down the line.

Tactical Supplier Management

Most contracts include service levels, which are reviewed at regular meetings. Typically, this will be a monthly review, although the frequency can vary depending on the contract. Where there are many detailed numerical performance measures, which are used to set penalties and rewards, this often results in long and bad-tempered meetings where each side is more concerned with proving their point than with discussing the service…and agreement is hard to achieve. (See What behaviour do your SLA targets encourage for more discussion of performance measures.)

When tactical supplier management is done well, conflicts are much less likely to happen. For example, one organization that I worked with used a simple spreadsheet to rate all of their major suppliers against the same set of criteria, such as:

  • Delivering contractual obligations
  • Responding to ad-hoc requests
  • Customer experience
  • etc.

Every supplier received a monthly rating on a scale of 1-5 against each of these criteria, and every supplier saw not only their own score, but that of all the other suppliers. As a supplier myself, I found this incredibly helpful. I knew exactly where I stood and what my customer thought of me. I was incentivized to be “top supplier” each month, and when the contract was due for renewal I could tell the sales person that we had been the best supplier for the past 8 months. This was a real win-win because the customer was driving me to deliver what they needed, and I was able to focus on the things they really cared about.

Tactical supplier management is the level for facilitating continual improvement of the service. Work with your suppliers to put in place a Continual Service Improvement (CSI) register for each contract, so that you actually help your supplier to get better at doing the things you need them to do. Don’t use this as a stick to beat them with, but as a tool to help them to help you. If you’re not familiar with CSI then try reading The Help You Need to Adopt Continual Service Improvement.

Operational Supplier Management

Sometimes suppliers let us down because we don’t do enough to help them get it right. It is really important to ensure that every time we interact with the supplier, we give them everything they need to help us. If the supplier is running a service desk, then we must make sure they have a good description of the incident; if they are providing support to a project then we must make sure they have everything they need to deliver; and so on. It’s helpful to think about your interactions with your suppliers in exactly the same way as you think about interactions with your customers - from the perspective of customer experience.

It's All About Relationships

You do need a contract to define what the supplier will deliver, and what you will pay for this, but a contract is never enough.

You should recognize that your supplier is entitled to make a reasonable profit on the contract, and they should acknowledge that you are entitled to a decent level of service. As long as both parties agree on those two points, it’s usually possible to find a way of managing any contract deficiencies. If you have a good relationship, then anything is possible! Maybe you can allow them to miss some less important service levels that are difficult to meet, and in return they can focus on exceeding the contractual targets on the things that really matter to you. Maybe you can use continual service improvement to gradually tune the deliverables to the point that they are exactly what you need. The bottom line is that truly effective supplier management helps your suppliers to help you, rather than just giving them a hard time when they miss their targets.

Summary

Managing suppliers involves thinking about three levels of activity: strategic, tactical, and operational. Each of these levels makes a contribution to supplier management, but the most important thing you should do is to build a relationship with your suppliers.

If your current supplier relationships are confrontational, based on disputing penalties and rewards every month, then try stepping back and thinking about how you can help your suppliers to help you. If you get it right, then you will both benefit.

 

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